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The dollar seems to be the centerpiece of the whole puzzle, as the greenback has taken ahuge hit over the last two trading days, accelerating a down trend that has been in placefor a few weeks.
And while dollar short sellers have been doing well, those who have been long gold, eitherdirectly or through a gold ETF (GLD, see below) have been doing well.
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The real question, though, is what the current geopolitical situation means for stocktraders and investors, and whether any of the current trends will change significantlyover the next few days or weeks.
And the answer is not all that simple, given the current scenario.
The stock market has been clearly making a bet that something good is heading its way, orit wouldn't have rallied 14.4% off of the S & P 500's bottom since July.
Which of course makes any reasonable person wonder what could be so positive that stockshave rallied this much, given the fact that little seems to have changed in the way of thegeopolitical situation.
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The only two factors that have changed, are the price of oil (see USO, above) and themajority party in Congress. And it is quite possible that those two factors are asresponsible as any.
Consider the fact that the 20% drop in crude oil prices, is akin to a major income tax cuton consumers, and may be at least partially responsible for the 6% rise in sales reportedby retailers on Black Friday.
More interesting is the fact that several key Democrats, while on the Sunday talkshowcircuit, made it clear that their legislative agenda would be aimed at "mainstreamAmerica," and that they would "initially" not dally in highly partisanissues.
Indeed, Wall Street, whose time frame can simultaneously be that of a gnat, as well asthat of an immortal being, seems to be telling investors that for now, something verydramatic has to happen in order for the rally in stocks to be derailed.
Liquidity Is The Key
All markets rise and fall. And this one will be no different, although our long termforecast for a Dow Jones Industrial Average move toward at 16,000, likely within the nextthree years, remains in place.
There is no way to know if and when such an event will come to pass. All we can do is lookat the market, and the signs that are available.
Yet, one thing is certain, the bane of all markets is illiquidity, something which isapparently not a factor on Wall Street, at least not yet.
Which of course makes the upcoming barrage of economic data, and the heavy schedule ofFederal Reserve speakers on the trail very important.
On Tuesday and Wednesday we'll get numbers on the housing market, while consumerconfidence will hit the street on Wednesday, while on Thursday, the Federal Reserve willrelease its personal consumption expenditure deflator, which is often a market movingnumber.
Meanwhile, Fed Chief Ben Bernanke has two speeches scheduled this week.
Conclusion
This is not a time withougt danger for investors. To be sure, there are some very seriouscrosscurrents that look ready to crash into some sort of central hub.
Still, money talks. And right now, there is plenty of money sloshing around the system,despite the weakness in the U.S. Dollar.
The private equity printing press is not showing signs of slowing its pace. And thetechnical underpinnings for the market remain fairly stout.
Indeed, the keys to the longevity of the rally remain how much money is left to beinvested, and how willing money managers and speculators are willing to put it to work.
Can our perspective change? Those familiar with this space should know that the answer isyes. And that our mind can change in a hurry.
So, what's the bottom line? Wall Street is due for a gut check. And the way the marketswork in this day and age, we'll have a fairly good idea within the next few days.
Meanwhile, a good strategy is to monitor all open positions on a frequent basis and tokeep a good eye on those sell stops.
Oil And Commodity Summary:
Saudis Re-evaluate Position
The energy markets are faced with a double set of reasons that might boost prices, OPECgetting tough, and a blast of cold air headed for the U.S.
Remarks by Saudi Arabian Oil Minister Al Naimi boosted crude prices overnight, as a majorArctic front is working its way toward Montana, South Dakota, and Wyoming, and weatherforecasters are predicting that it could become the first cold blast of air to hit theMidwest and the Northeast U.S.
Al Naimi told reporters that OPEC may increase its production cuts beyond the 1.2 millionbarrels per day that it has already agreed to. The market has mostly ignored theproduction cuts, given the cartel's inability to adhere to such cuts in the past, whenprices have remained high.
Crude oil was trading near $60 per barrel overnight, as traders begin to handicap theSaudi warning and the weather.
U.S. oil supplies are in decent shape, as of the latest reporting period, November 17,when crude supplies jumped over 5 million barrels, surprising traders. Gasoline anddistillate supplies were less robust with natural gas remaining fairly comfortable aswell.
The bottom line is that we are back to a weather market in energy. If and when the weatherturns really cold, we'll see a move of some sort. Until then, barring a major externalevent, we'll see this kind of crazy action on a daily basis.
From a trading standpoint, the only thing to do is to adhere to trading rules, and tomonitor sell stops, as the potential for lower prices is clearly in place.
See our energy trading section for investment ideas.
The metals markets are getting a case of takeover fever, with the steel stocks taking offlast week, and the copper stocks possibly joining them this week.
Visit our gold section for more on metal stocks. New stocks have been added to the listalong with recommendations on the Gold ETF.
The oil market remains in an uneasy balance with the $57-$60 has been broken.
Gold remained above the $600 area.
Natural gas is staill trading in the $7-$8 range, and gasoline futures rose above $1.50.
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The Wilderhill Clean Energy Index continues to improve, looking to build on its recentbottom near 180. See our energy section for new green energy picks.
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Crude oil prices broke below the $58-$60 area. A rally above $62 would reverse the shortterm down trend.
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The Philadelphia Oil Service Index (OSX) is still struggling at 200, its recent line inthe sand.
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The Amex Oil Index (XOI) has held above 1100.
TechnicalSummary:
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Strange Mix Of Sentiment And Momentum Appears
The stock market is at a strange technical juncture. On the one side, there is plenty ofmomentum. On the other side there is plenty of pessimism.
For now, that is likely to be a good mixture, especially since the seasonal tendencies arefor the market to rise.
The problems will start to rise, though, when the momentum continues and the bears beginto throw in the towel. At that point, the market will likely be very vulnerable to asignificant amount of selling.
We are not likely to be there, just yet, although we are closer to that point than we werein July.
Our overall, long term forecast remains upbeat, unless the major indexes fall convincinglybelow their 200 day moving averages.
The S & P 500 again closed above 1400, while the Nasdaq has been making steadyprogress.
Momentum is intact, as new highs haverecently registered on the Dow Industrials, the Nasdaq, and the Nasdaq 100.
Other signs are still positive such as the NYSE advance decline line and the number ofstocks making 52 week highs.
Growth stocks are still showing improvement, as value stocks are still acting well. Andthe small stocks, although they have weakened in the last few days, have also rallied oflate.
Volume and breadth have remained quite positive, though, and again the technology stockshave assumed a leadership role.
What To Do Now
The trend is clearly up, although the short term trend could be slightly rocky due togeopolitical developments. Focus on strength as well as turnaround stories in both sectorsand stocks. Visit our individual stock sections for details.
The rotation into technology and out of energy continues. If there is a Santa Claus rally,it could be led by tech.
We have added several new recommendations to all our portfolios, with emphasis ontechnology, as well as energy, and biotech.
Weak stocks should still be sold, and strong stocks should be monitored for growing signsof weakness.
We have also added new positions to our Fallen Angels portfolio.
Check all our sections daily. See tech, biotech, Fallen Angels, and timing systems forthe latest adjustments. Our ETF trading systems for energy, Spyders, Small Caps, andtechnology have also been updated.
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Sentiment Summary:
Strange Brew Of Indicators
Option players remain very bearish, which is a positive for the markets. The flip side isthat our DOOG indicator (see below) has given a reading of 90, meaning that this is now afull blown momentum market. Momentum markets, when they get this hot, are likely to golonger than anyone expects them to, but also eventually die an ugly death.
The CBOE Put/Call ratio checked in at 1.05. A consistent string of low readings can be asign of excessive optimism and often signals a top in the markets. Readings below 0.5 areof concern, but not as serious as readings below 0.40. Readings above 1.0 are bullish. Thenumbers cited here are meant to be evaluated on a closing basis.
The CBOE P/C ratio for indexes checked in at 2.69. Numbers above 2.0 as the market sellsoff, often lead to rallies. Readings below 0.9 suggest too much bullish sentiment, just asreadings above 2 are usually required to mark major bottoms.
The VIX and VXN had readings of 9.90 and 15.02, still holding steady. A fall near or below20 on VIX and 30-40 on VXN is considered negative, a fact that is usually confirmed whenthe volatility indexes begin to rise. Readings above 40 and 50, respectively, are oftensigns that a bottom may be close to developing.
The Duarte Overbought-Oversold Gauge (DOOG) rose to a very hot level of 90. This is now amajor overbought market on a momentum run.
NYSE insiders were buyers of stock for the week of 11-10-06. NYSE insider short sales arestill at very low levels. When NYSE specialists raise their short sales, and sell stocks,risk increases dramatically. There is a two week lag for these figures.
Market Vane's Bullish Consensus checked in at 73% on on 11-24-06. This is the tenth weekabove 70%, which is a sell signal.
Market Moves
Look To International ETFs For Market Clues
The ishares German (AMEX: EWG) and ishares Malaysia (AMEX: EWM) exchange traded funds havebeen on a tear lately.
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Indeed the international markets, both established and emerging sectors, have been showingsome serious strength of late.
Presumably, a weaker dollar would tend to help these investments. Yet, as the dollar hascollapsed, and geopolitical pressures have increased, both of these funds might have sometough sledding ahead.
The German economy has been showing strength of late, as have the economies of the Asiancontinent. Much of the bullish action has to do with globalization, especially with growthin China remaining robust.
Still, when the currency markets start to become volatile, one of the first areas to gethit are the emerging markets, followed by European bourses.
For those reasons, these two ETFs are worth watching over the next few days.
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The Amex Biotech Index (BTK) is within reach of its recent highs. The 780-800 area isimportant resistance.
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The Amex Pharmaceuticals Index (DRG) might have bottomed, but it's not showing muchstrength.
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The Philadelphia Semiconductor Index (SOX) remained above 480, an important upsidereversal.
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Small stocks have yet to deliver convincing all time highs in the recent market rally.
